Shift to Proof of Stake Roils ETH Market But Perhaps Only for the Short Term
Ever since The Merge took place on Sept. 15 investors have looked on in dismay as Ether lost a fifth of its value over the next four days.
What was going on? Many traders expected some profittaking and sell-the-news market action, but the historic upgrade was supposed to usher in a vibrant new era for Ethereum, not a spasm of bearish selling.
Now, one of the causes for the selloff may be emerging — Ethereum miners are dumping ETH at record levels, according to data from OKLink. Miners offloaded 17,000 ETH in the past week.
“The massive dumping from ex-miners is a significant factor to the ETH downtrend,” Harrison Dell, the director of Cadena Lega, told The Defiant. “Once the market has absorbed that impact of The Merge including the exit of ex-miners who held a substantial amount of ETH, it may start to recover and the deflationary mechanics become clearer.”
Moreover, analysts believe investors have been selling risky assets ahead of a Federal Reserve’s two-day meeting of its Open Markets Committee beginning today. Investors are bracing for steep interest rate hikes in the wake of soaring inflation in August. ETH was up about 3% in the last 24 hours, according to The Defiant Terminal.
Onlookers predicted that The Merge would eliminate the heavy selling previously coming from Ethereum’s miners. The upgrade replaced their services with a Proof of Stake approach that relies on validating new blocks for the chain instead of traditional Proof of Work mining.
The Merge eliminated 13,000 ETH in daily rewards issued to miners, according to calculations by The Defiant. With just 1,730 new Ether entering circulation daily as staking rewards and those coins remaining locked on the Beacon Chain until withdrawals are activated with the network’s next major upgrade, analysts predicted Ether selling pressure would dry up after The Merge.
But OKLink’s data shows this is not the case, with miners dumping 17,000 ETH since The merge.
ETH miners were accumulating rewards after the bear market took hold in crypto in May instead of liquidating regularly,” Dell said.
“Many miners were awaiting positive price action from The Merge, and when that didn’t come as expected, they exited the ETH space entirely to free up capital for new ventures,” he said.
Toby Chapple, the head of trading at wealth management firm, ZeroCap, told The Defiant, added that many miners still have large balances that they will be selling down over time.
“Short term holders looking for ETHW tokens sold out initially and went looking for more optimal sources of return,” Chapple said. “The ‘buy the rumor, sell the fact’ has played out.”
Chapple added that retail traders were also “excessively long” in the lead up to The Merge, making them vulnerable to liquidation.
But Zerocap’s head of trading is not worried long term. “Those selling forces will abate over time,” Chapple said. “As they do, the supply shock will become more prevalent from PoS, and the demand shock from new institutional flow from the likes of ESG funds (that previously couldn’t invest because of electricity usage) start to invest.”
“Long ETH was a very crowded trade before the merge, so the movement is more of a ‘buy the rumor, sell the news’ drop,” Jack Tan, the CEO of the Woo Network, told The Defiant. “In addition, the SEC said that ETH could be considered as security right after the merge was completed, which accelerated the regulation concerns around ETH since the Tornado cash sanction.”
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Bobby Ong, the co-founder of CoinGecko, believes the pull-back has more to do with macro-forces.
“I would say that the overall market decline, including for ETH, was due to the Federal Open Market Committee meeting taking place today,” Ong said. “Now that the Ethereum Merge is complete, all eyes are on the FOMC meeting, which is scheduled to take place today.
“Markets are expecting further interest rate hikes to get inflation under control, resulting in the pre-emptive selling of risk assets like equities and crypto.”
On Monday, Goldman Sachs strategists predicted that interest rates will be raised four more times between now and 2024, expecting rates will be held at between 4.25% and 4.5% until 2024 in a bid to tackle inflation.
They tipped that the two-day meeting will produce a third consecutive interest rate hike of 75 basis points after inflation continued to rise at a rate exceeding expectations in August.
“On top of the ETH market dynamics, we have the unfortunate heightened correlation of crypto to traditional markets” Chapple said. “Going into FOMC, we are seeing global risk-off behavior, which is compounding the excess long speculators problems.”